United Kingdom VAT & Duties Tribunals Decisions

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You are here: BAILII >> Databases >> United Kingdom VAT & Duties Tribunals Decisions >> Flame Cheater International Ltd v Revenue & Customs [2007] UKVAT V20415 (30 October 2007)
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Cite as: [2007] UKVAT V20415

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Flame Cheater International Ltd v Revenue & Customs [2007] UKVAT V20415 (30 October 2007)

20415

REQUIREMENT FOR SECURITY – decision to require security made in December 2006 and amended in May 2007 - Appellant had very poor compliance record - one business with which director of the Appellant had been connected had become insolvent owing debt to Customs – another business with which director of the Appellant was connected also had a very poor compliance record – whether decision to require security a reasonable decision when it was made – yes –appeal dismissed – VATA 1994 Sch 11 para 4(2)

LONDON TRIBUNAL CENTRE

FLAME CHEATER INTERNATIONAL LIMTED

Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY'S

REVENUE AND CUSTOMS

Respondents

Tribunal : DR A N BRICE (Chairman)

Sitting in London on 22 October 2007

Derek Harris, the Managing Director of the Appellant, for the Appellant

Gloria Orimoloye, Advocate in the Office of the Solicitor for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2007


 


DECISION

The appeal

1. Flame Cheater International Limited (the Appellant) appeals against a decision of The Commissioners for Her Majesty's Revenue and Customs (Customs) dated 1 December 2006 and amended on 14 May 2007. The amended decision was that, as a condition of the Appellant making taxable supplies, it was required to give security of £19,453.16 (or of £18,153.16 if monthly returns were submitted). The decision was made under the powers contained in paragraph 4(2) of schedule 11 of the Value Added Tax Act 1994 (the 1994 Act).

The legislation

2. Paragraph 4(2) of schedule 11 of the 1994 Act provides:

"If they think it necessary for the protection of the revenue, the Commissioners may require a taxable person, as a condition of his supplying or being supplied with goods or services under a taxable supply, to give security … of such amount and in such manner as they may determine, for the payment of any VAT which is or may become due from;

(a) the taxable person; or

(b) any person by or to whom relevant goods or services are supplied."

The evidence

3. A bundle of documents was produced by Customs and this contained copies of some letters from the Appellant to Customs. Oral evidence was given on behalf of the Appellant by Mr Derek Harris, the Managing Director of the Appellant who also appeared for the Appellant at the hearing. Oral evidence on behalf of Customs was given by Ms Clare Bell, the Officer who gave the decision dated 1 December 2006 and by Ms Tish Birch, the Officer who gave the amended decision dated 14 May 2007.

The facts

4. From the evidence before me I find the following facts.

Mr Harris and his businesses

5. In addition to being a director of the Appellant, Mr Harris is, or has been, connected with two other companies. One, called Flame Cheater Limited (Flame Cheater) was the predecessor of the Appellant and the other, called Nimrod Fire Protection Limited (Nimrod) was acquired by Mr Harris at about the time that he formed the Appellant.

Flame Cheater

6. Flame Cheater was registered for value added tax in 1982. In January 1992 Mr Harris was appointed to be one of its two directors and Jill Stevens (now Mrs Harris) was appointed to be company secretary. On 4 February 1994 Flame Cheater ceased trading owing the Respondents the sum of £32,228.64.

Nimrod

7. Nimrod was registered for value added tax on 1 August 1976. Records were available from 1981. Between 1981 and 1986 Nimrod had an excellent compliance record. Mr Harris acquired Nimrod in 1992 and Mr Harris is now the only director of Nimrod and his wife is the company secretary. Nimrod and the Appellant now occupy the same premises, have the same overheads and have some employees in common.
8. Since 1986 very few of Nimrod's returns have been rendered in time. Some delays were for short periods but some delays were lengthy. The lengthiest delays occurred in 2001 and 2002 when delays of 207, 201 and 281 days occurred. The return for the accounting period ending on 30 September 2004 should have been received by Customs by 31 October 2004 but was not received until 6 January 2005. As at 1 December 2006 no returns had been received after January 2005. As at 1 December 2006 there had been 39 default surcharges at 15% and there were seven outstanding returns. The amount of tax outstanding was £12,096 and the amount of default surcharges outstanding was £2,078.30 making a total of £14,174.30

The Appellant

9. The Appellant started to trade on 1 June 1993. It supplies fire extinguishers. Its director is Mr Harris and his wife is the company secretary. The first return was for the accounting period ending on 30 September 1993. Since that date only one return (for the accounting period ending in February 1994) and the tax have been received in time. Some delays were for a single number of days but other delays were lengthy. From 2000 to 2002 the delays for each accounting period were of 53, 45, 109, 58, 57, 65, 789, 71, 140, 137, 122, 147 and 72 days. From 2004 to 2005 the delays for each accounting period were of 138, 444, 61, 335, 257 and 188 days. There have been twenty-six default surcharges at the rate of 15%. As at 1 December 2006 there were five outstanding returns and the amount due to the Respondents was £19,278.90 made up as £16,715.42 for tax and £2,563.48 for default surcharges. .

The decision to require security

10. The Appellant's compliance record, and the records of both Flame Cheater and Nimrod, were reviewed by Ms Bell in November 2006. Ms Bell formed the view that the pattern of non-compliance indicated that security was required to protect the revenue. In calculating the amount of the security Ms Bell determined an annual amount of tax by reference to the tax due as shown on the last four returns which had then been received. These four returns indicated that the total net tax due for twelve months was £9,642.03. On the basis that quarterly returns were to be submitted then Ms Bell halved the annual amount of tax to find a figure for six month's liability which gave a figure of £4,821.02 which, rounded down, came to came to £4,800. To that figure Ms Bell added the amount of tax then outstanding, namely £16,715.42 making a total of £21,515.42. If monthly returns were to be submitted then Ms Bell calculated that four months' tax liability would be £3,214.00 which, with the outstanding tax, amounted to £19,915.42. Ms Bell thus considered that the amounts of security required were £21,515.42 if quarterly returns were submitted or, alternatively, £19,915.42 if monthly returns were submitted.
11. Customs wrote to the Appellant on 1 December 2006 giving the formal notice against which the Appellant appealed.

Events after the issue of the notice

12. Mr Harris wrote to Customs on 12 January 2007 mentioning difficulties with the ozone layer legislation, with a previous book-keeper and with a flood which, he said, had damaged the business records. The letter said that the outstanding returns would be dealt with as a matter of urgency. At this stage the matter was passed from Ms Bell to Ms Birch who reviewed the whole matter. However, no dates had been given for the events described by Mr Harris. Ms Bell thought that the difficulties had been recent and formed the view that the Appellant's poor compliance record pre-dated these events. Accordingly, she formed the view that security was still required. However, since 1 December 2007 another return had been received and so Ms Birch re-calculated the amount of security required in the light of that return and notified the Appellant on 23 January 2007.
13. On 13 March 2007 the Appellant sent three more returns for the accounting periods ending in February, May and August 2006. Ms Birch remained of the view that security was still required but she re-calculated the amount of security based on the tax shown on the recent returns and notified the amended amount to the Appellant on 14 May 2007.

The arguments

14. For the Appellant Mr Harris did not dispute the facts or the amount of the security required. However, he argued that Flame Cheater had faced a number of difficulties. The product had been based on a gas which had been banned by international protocol in 1993. A replacement had been found in Italy but this had then been banned by the European Union also in 1993. Also in 1993 Flame Cheater had suffered a loss as a result of a bad debt connected with the fraudulent activity of its book-keeper. He had called in advisers and had been advised to form the Appellant to take over the assets of Flame Cheater. In 1996 the Appellant's suppliers had suddenly withdrawn the product then sold by the Appellant and there was a need to alter all the sales literature and the technical information. Also, the Appellant was not able to provide after-sales service to customers who had out of date equipment. Then in 2005 the Appellant's then book-keeper had been taken ill and rushed to hospital and the Appellant had been left without a book-keeper. The replacement book-keeper had left the books in disarray. Also in 2005 or 2006 there had been a flood at the premises.
15. For Customs Ms Orimoloye argued that the decision to require security was a reasonable decision at the time it was made. Mr Harris had been involved with Flame Cheater which had become insolvent owing Customs about £32,000. Nimrod, which was a company with which Mr Harris was connected, had a very poor compliance record. Mr Harris was the sole director of Nimrod and was responsible for its non-compliance. The Appellant also had had a very poor compliance record since 1993. Mrs Orimoloye relied upon Customs and Excise Commissioners v Peachtree Enterprises Ltd [1994] STC 747 and John Dee Limited v Customs and Excise Commissioners [1995] STC 941 for the principle that the Tribunal had to consider whether the decision to require security was a reasonable decision when it was made.

Reasons for decision

16. In considering the arguments of the parties I first summarise the legal principles. First, I should decide whether the Appellant has established that the decision of Customs is unreasonable or whether it was arrived at by taking into account matters which were not relevant or by ignoring matters which were relevant. Secondly, I have to limit myself to considering facts and matters which were known when the disputed decision was made. Thirdly, the test is whether Customs acted in a way in which no reasonable Commissioners could have acted. Finally, the Tribunal cannot exercise a fresh discretion; the protection of the revenue is not the responsibility of the Tribunal.
17. Applying those principles to the facts of the present appeal I am of the view that the decision of 1 December 2006, and the amended decision of 14 May 2007, to require security in the amounts stated were reasonable decisions when they were made. At that time Customs knew about the poor compliance record of the two other businesses with which Mr Harris had been connected. They also knew about the compliance record of the Appellant which was extremely poor; in particular there is a history of very late returns and late payments of tax. In my view it was reasonable to conclude that security was required. The amount of the security required was based on the four most recent returns then in the possession of Customs and on the amount of tax then outstanding and I regard the amounts required as reasonable on the dates they were required. In reaching their decisions Customs took into account the information supplied by Mr Harris. For that reason I dismiss the appeal.
18. In his correspondence with Customs Mr Harris did not give dates for the events he put forward as explaining the poor compliance of the Appellant and so the dates could not be taken into account when deciding on the requirement for security. Those dates were given at the hearing and I have considered whether to request Customs to review their decision in the light of this evidence but have decided not to do so. In my view the events of 1993 and 1996 cannot explain the very poor compliance record of the Appellant in the many years since they happened. Neither can the events in 2005 and 2006 explain the very poor compliance record before those dates.

Decision

19. For the above reasons the appeal is dismissed.

DR NUALA BRICE

CHAIRMAN

RELEASE DATE: 30 October 2007

LON/2007/0769

29.10..07